DTLAP 10-Q Quarterly Report June 30, 2019 | Alphaminr
Brookfield DTLA Fund Office Trust Investor Inc.
ALPHAMINR

DTLAP 10-Q Quarter ended June 30, 2019

Balance Sheet
Cash Flow
Income Statement
Debt
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
10-Q 1 dtla201963010q.htm REPORT ON FORM 10-Q FOR THE QUARTER ENED JUNE 30, 2019 Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to __________________

Commission File Number: 001-36135
________________________
BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.
(Exact name of registrant as specified in its charter)
Maryland
46-2616226
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
250 Vesey Street, 15th Floor
New York, NY
(Address of principal executive offices)
10281
(Zip Code)
(212) 417-7000
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer þ
Smaller reporting company ¨
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
7.625% Series A Cumulative Redeemable Preferred Stock,
$0.01 par value per share
DTLA-P
New York Stock Exchange

As of August 9, 2019, 100% of the registrant’s common stock (all of which is privately owned and is not traded on any public market) was held by Brookfield DTLA Holdings LLC.


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2019

TABLE OF CONTENTS

Page
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements.
Item 2.
Item 3.
Item 4.
PART II—OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


PART I—FINANCIAL INFORMATION

Item 1.
Financial Statements.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

June 30, 2019
December 31, 2018
(Unaudited)
ASSETS
Investments in Real Estate:
Land
$
222,555

$
227,555

Buildings and improvements
2,256,859

2,245,818

Tenant improvements
425,514

361,077

Investments in real estate, gross
2,904,928

2,834,450

Less: accumulated depreciation
459,446

418,205

Investments in real estate, net
2,445,482

2,416,245

Investment in unconsolidated real estate joint venture
34,911

—

Cash and cash equivalents
46,911

80,421

Restricted cash
25,279

25,349

Rents, deferred rents and other receivables, net
149,629

151,509

Intangible assets, net
37,647

44,640

Deferred charges, net
69,733

67,731

Due from affiliates
6,659

—

Prepaid and other assets, net
3,017

9,763

Total assets
$
2,819,268

$
2,795,658

LIABILITIES AND DEFICIT
Liabilities:
Mortgage loans, net
$
2,143,201

$
2,140,724

Accounts payable and other liabilities
71,934

63,678

Due to affiliates
5,531

3,834

Intangible liabilities, net
10,669

12,454

Total liabilities
2,231,335

2,220,690

Commitments and Contingencies (See Note 17)








See accompanying notes to condensed consolidated financial statements.

1

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except share amounts)

June 30, 2019
December 31, 2018
(Unaudited)
LIABILITIES AND DEFICIT (continued)
Mezzanine Equity:
7.625% Series A Cumulative Redeemable Preferred Stock,
$0.01 par value, 9,730,370 shares issued and
outstanding as of June 30, 2019
and December 31, 2018
$
419,206

$
409,932

Noncontrolling Interests:
Series A-1 preferred interest
409,422

400,816

Senior participating preferred interest
22,692

23,443

Series B preferred interest
215,085

181,698

Total mezzanine equity
1,066,405

1,015,889

Stockholders’ Deficit:
Common stock, $0.01 par value, 1,000 shares
issued and outstanding as of June 30, 2019
and December 31, 2018
—

—

Additional paid-in capital
196,335

195,825

Accumulated deficit
(449,415
)
(385,158
)
Accumulated other comprehensive loss
(1,245
)
(107
)
Noncontrolling interests
(224,147
)
(251,481
)
Total stockholders’ deficit
(478,472
)
(440,921
)
Total liabilities and deficit
$
2,819,268

$
2,795,658















See accompanying notes to condensed consolidated financial statements.

2

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands)

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Revenue:
Lease income
$
68,913

$
63,657

$
135,298

$
127,517

Parking
9,770

9,334

19,388

18,471

Interest and other
483

11,203

687

13,417

Total revenue
79,166

84,194

155,373

159,405

Expenses:
Rental property operating and maintenance
25,567

23,000

48,698

44,743

Real estate taxes
9,589

10,566

19,261

20,616

Parking
2,423

2,377

5,140

5,129

Other expense
1,885

4,281

5,397

6,518

Depreciation and amortization
25,812

23,138

51,454

47,564

Interest
25,107

26,096

49,973

49,878

Total expenses
90,383

89,458

179,923

174,448

Other Income:
Gain from derecognition of assets
14,977

—

14,977

—

Equity in loss of unconsolidated
real estate joint venture
(289
)
—

(289
)
—

Total other income
14,688

—

14,688

—

Net income (loss)
3,471

(5,264
)
(9,862
)
(15,043
)
Net loss (income) attributable to
noncontrolling interests:
Series A-1 preferred interest returns
4,303

4,303

8,606

8,606

Senior participating preferred interest
redemption measurement adjustment
(179
)
768

(751
)
2,425

Series B preferred interest returns
4,591

3,921

8,682

7,800

Series B common interest –
allocation of net income (loss)
18,659

(9,889
)
28,584

(22,584
)
Net loss attributable to Brookfield DTLA
(23,903
)
(4,367
)
(54,983
)
(11,290
)
Series A preferred stock dividends
4,637

4,637

9,274

9,274

Net loss attributable to common interest
holders of Brookfield DTLA
$
(28,540
)
$
(9,004
)
$
(64,257
)
$
(20,564
)






See accompanying notes to condensed consolidated financial statements.

3

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited; in thousands)

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Net income (loss)
$
3,471

$
(5,264
)
$
(9,862
)
$
(15,043
)
Other comprehensive (loss) income:
Derivative transactions:
Unrealized derivative holding (losses) gains
(1,561
)
835

(2,388
)
2,537

Less: reclassification adjustment for realized
gains included in net income (loss)
—

—

—

1,198

Total other comprehensive
(loss) income
(1,561
)
835

(2,388
)
1,339

Comprehensive income (loss)
1,910

(4,429
)
(12,250
)
(13,704
)
Less: comprehensive income (loss)
attributable to noncontrolling interests
26,557

(460
)
43,871

(3,052
)
Comprehensive loss attributable to
common interest holders of
Brookfield DTLA
$
(24,647
)
$
(3,969
)
$
(56,121
)
$
(10,652
)




























See accompanying notes to condensed consolidated financial statements.


4

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited; in thousands, except share amounts)

Number of
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Non-
controlling
Interest
Total
Stockholders ’
Deficit
Common
Stock
Balance, December 31, 2018
1,000

$
—

$
195,825

$
(385,158
)
$
(107
)
$
(251,481
)
$
(440,921
)
Net (loss) income
(31,080
)
17,747

(13,333
)
Other comprehensive loss
(394
)
(433
)
(827
)
Contributions
310

310

Dividends, preferred returns and
redemption measurement
adjustments on mezzanine equity
(4,637
)
(7,822
)
(12,459
)
Balance, March 31, 2019
1,000

—

196,135

(420,875
)
(501
)
(241,989
)
(467,230
)
Net (loss) income
(23,903
)
27,374

3,471

Other comprehensive loss
(744
)
(817
)
(1,561
)
Contributions
200

200

Dividends, preferred returns and
redemption measurement
adjustments on mezzanine equity
(4,637
)
(8,715
)
(13,352
)
Balance, June 30, 2019
1,000

$
—

$
196,335

$
(449,415
)
$
(1,245
)
$
(224,147
)
$
(478,472
)



























See accompanying notes to condensed consolidated financial statements.

5

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (continued)
(Unaudited; in thousands, except share amounts)

Number of
Shares
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
(Loss) Income
Non-
controlling
Interest
Total
Stockholders ’
Deficit
Common
Stock
Balance, December 31, 2017
1,000

$
—

$
194,210

$
(256,877
)
$
(273
)
$
(280,008
)
$
(342,948
)
Net loss
(6,923
)
(2,856
)
(9,779
)
Other comprehensive income
240

264

504

Dividends, preferred returns and
redemption measurement
adjustments on mezzanine equity
(4,637
)
(9,839
)
(14,476
)
Balance, March 31, 2018
1,000

—

194,210

(268,437
)
(33
)
(292,439
)
(366,699
)
Net loss
(4,367
)
(897
)
(5,264
)
Other comprehensive income
398

437

835

Dividends, preferred returns and
redemption measurement
adjustments on mezzanine equity
(4,637
)
(8,992
)
(13,629
)
Balance, June 30, 2018
1,000

$
—

$
194,210

$
(277,441
)
$
365

$
(301,891
)
$
(384,757
)





























See accompanying notes to condensed consolidated financial statements.

6

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)

For the Six Months Ended
June 30,
2019
2018
Cash flows from operating activities:
Net loss
$
(9,862
)
$
(15,043
)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization
51,454

47,564

Gain from derecognition of assets
(14,977
)
—

Equity in loss of unconsolidated real estate joint venture
289

—

Provision for doubtful accounts
11

—

Amortization of below-market leases/
above-market leases
622

73

Straight-line rent amortization
(5,534
)
(8,024
)
Amortization of tenant inducements
1,969

1,992

Amortization of debt issuance costs
2,625

4,307

Realized gain on derivative financial instruments
—

(1,198
)
Changes in assets and liabilities:
Rents, deferred rents and other receivables, net
(279
)
(10,320
)
Deferred charges, net
(5,396
)
(1,339
)
Due from affiliates
(3,276
)
—

Prepaid and other assets, net
5,762

5,026

Accounts payable and other liabilities
(3,393
)
(4,829
)
Due to affiliates
1,697

(8,894
)
Net cash provided by operating activities
21,712

9,315

Cash flows from investing activities:
Expenditures for real estate improvements
(80,359
)
(35,270
)
Net cash used in investing activities
(80,359
)
(35,270
)
Cash flows from financing activities:
Proceeds from mortgage loans
—

323,500

Principal payments on mortgage loans
—

(211,831
)
Distributions to Series B preferred interest
(2,695
)
(12,458
)
Distributions to senior participating preferred interest
—

(2,025
)
Proceeds from Series B preferred interest
27,400

—

Contributions to additional paid-in capital
510

—

Financing fees paid
(148
)
(2,080
)
Net cash provided by financing activities
25,067

95,106

Net change in cash, cash equivalents and
restricted cash
(33,580
)
69,151

Cash, cash equivalents and restricted cash at beginning of period
105,770

67,505

Cash, cash equivalents and restricted cash at end of period
$
72,190

$
136,656


See accompanying notes to condensed consolidated financial statements.

7

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited; in thousands)

For the Six Months Ended
June 30,
2019
2018
Reconciliation of cash and cash equivalents
and restricted cash:
Cash and cash equivalents at beginning of period
$
80,421

$
31,958

Restricted cash at beginning of period
25,349

35,547

Cash and cash equivalents and restricted cash at
beginning of period
$
105,770

$
67,505

Cash and cash equivalents at end of period
$
46,911

$
103,885

Restricted cash at end of period
25,279

32,771

Cash and cash equivalents and restricted cash at
end of period
$
72,190

$
136,656

Supplemental disclosure of cash flow information:
Cash paid for interest
$
47,476

$
46,244

Cash paid for income taxes
57

79

Supplemental disclosure of non-cash activities:
Accrual for real estate improvements
$
24,476

$
14,214

Accrual for deferred leasing costs
5,229

2,789

Contribution of investments in real estate, net to
unconsolidated real estate joint venture
20,139

—

(Decrease) increase in fair value of interest rate swaps
(2,388
)
2,537

Writeoff of rents, deferred rents and other receivables, net
129

—

Writeoff of fully depreciated non-operating furniture
and equipment included in prepaid and other assets, net
4,588

—




















See accompanying notes to condensed consolidated financial statements.

8


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1—Organization and Description of Business

Brookfield DTLA Fund Office Trust Investor Inc. (“Brookfield DTLA” or the “Company”) is a Maryland corporation and was incorporated on April 19, 2013. Brookfield DTLA was formed for the purpose of consummating the transactions contemplated in the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), and the issuance of shares of 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred stock”) in connection with the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. (together, “MPG”). Brookfield DTLA is a direct subsidiary of Brookfield DTLA Holdings LLC, a Delaware limited liability company (“DTLA Holdings”, and together with its affiliates excluding the Company and its subsidiaries, the “Manager”). DTLA Holdings is an indirect partially-owned subsidiary of Brookfield Property Partners L.P., an exempted limited partnership under the Laws of Bermuda (“BPY”), which in turn is the flagship commercial property entity and the primary vehicle through which Brookfield Asset Management Inc., a corporation under the Laws of Canada (“BAM”) invests in real estate on a global basis.

As of June 30, 2019 and December 31, 2018 , Brookfield DTLA owned BOA Plaza, EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, which are Class A office properties, and Figat7th, a retail center nested between EY Plaza and 777 Tower, all of which are located in the Los Angeles Central Business District (the “LACBD”).

On May 31, 2019 , Brookfield DTLA Fund Properties II LLC, a wholly-owned subsidiary of the Company (“New OP”), entered into an agreement to contribute and transfer all of its wholly-owned interests in Brookfield DTLA 4050/755 Inc. (the “Property Owner”), the indirect property owner of 755 South Figueroa, a residential development property, in exchange for noncontrolling interests in a newly formed joint venture. See Note 4 “Investment in Unconsolidated Real Estate Joint Venture.”

Brookfield DTLA receives its income primarily from lease income generated from the operations of its office and retail properties, and to a lesser extent, income from its parking garages.



9


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 2 — Basis of Presentation

As used in these condensed consolidated financial statements and related notes, unless the context requires otherwise, the terms “Brookfield DTLA,” the “Company,” “us,” “we” and “our” refer to Brookfield DTLA Fund Office Trust Investor Inc.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information and with the instructions to Form 10‑Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, consisting of only those of a normal and recurring nature, considered necessary for a fair presentation of the financial position and interim results of Brookfield DTLA as of and for the periods presented have been included. The results of operations for interim periods are not necessarily indicative of those that may be expected for a full fiscal year.

The condensed consolidated balance sheet data as of December 31, 2018 has been derived from Brookfield DTLA’s audited financial statements; however, the accompanying notes to the condensed consolidated financial statements do not include all disclosures required by GAAP.

The financial information included herein should be read in conjunction with the consolidated financial statements and related notes included in Brookfield DTLA’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 1, 2019 .

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. For example, estimates and assumptions have been made with respect to fair values of assets and liabilities for purposes of applying the acquisition method of accounting, the useful lives of assets, recoverable amounts of receivables, impairment of long-lived assets and the fair value of debt. Actual results could ultimately differ from such estimates.


10


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Reclassifications

During the year ended December 31, 2018 , the Company reclassified asset management fees earned by the Manager from rental property operating and maintenance expense to other expense in the consolidated statement of operations. Management does not include asset management fees as an input when evaluating the operating performance of Brookfield DTLA’s properties and created a new category within other expense during 2018 to capture such fees. For the three and six months ended June 30, 2018 , the Company reported rental property operating and maintenance expense totaling $24.6 million and $47.9 million and other expense totaling $2.7 million and $3.3 million in the condensed consolidated statement of operations. After the reclassifications, rental property operating and maintenance expense now totals $23.0 million and $44.7 million and other expense now totals $4.3 million and $6.5 million in the condensed consolidated statement of operations for the three and six months ended June 30, 2018 , respectively. This reclassification had no effect on the Company’s financial position, results of operations or cash flows in any year.

During the year ended December 31, 2018 , the Company also reclassified lease termination fees from interest and other revenue to lease income in the consolidated statement of operations in anticipation of adopting Accounting Standards Codification (“ASC”) Topic 842, Leases . For the three and six months ended June 30, 2018 , the Company reported interest and other revenue totaling $12.0 million and $14.9 million and rental income totaling $38.9 million and $79.9 million in the condensed consolidated statement of operations. After the reclassifications, interest and other revenue now totals $11.2 million and $13.4 million and rental income now totals $39.7 million and $81.4 million in the condensed consolidated statement of operations for the three and six months ended June 30, 2018 . See Note 3 “Leases” for reconciliation of lease income reported for the three and six months ended June 30, 2018 in the current year’s condensed consolidated statement of operations after the adoption of ASC Topic 842. This reclassification had no effect on the Company’s financial position, results of operations or cash flows in any year.

Recent Accounting Pronouncements

Accounting Pronouncement Adopted Effective January 1, 2019

Please refer to Note 3 “Leases” for a discussion of our adoption of Topic 842, Leases , on January 1, 2019.


11


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Accounting Pronouncements Effective January 1, 2020

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to amend the accounting for credit losses for certain financial instruments. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. In November 2018, the FASB released ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses . This amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Subtopic 842-30, Leases—Lessor . ASU 2016-13 and ASU 2018-19 are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019, with early adoption permitted as of the fiscal year beginning after December 15, 2018, including adoption in an interim period. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) , and made changes to its conceptual framework, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements , that are intended to improve the effectiveness of disclosures in notes to financial statements. ASU 2018-13 removes, modifies and adds certain disclosure requirements related to fair value measurements required by Topic 820. The guidance is effective for interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for any eliminated or modified disclosures. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810), Targeted Improvements to Related Party Guidance for Variable Interest Entities , which amends two aspects of the related-party guidance in Topic 810. Specifically, ASU 2018-17 (1) adds an elective private company scope exception to the variable interest entity guidance for entities under common control and (2) removes a sentence in ASC 810-10-55-37D regarding the evaluation of fees paid to decision makers to conform with the amendments in ASU 2016-17, Consolidation (Topic 810), Interests Held through Related Parties That Are under Common Control (issued in October 2016). ASU 2018-17 is effective for interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.


12


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 3 —Leases

Brookfield DTLA’s properties are leased to tenants under operating leases. The Company adopted ASC Topic 842, Leases, on January 1, 2019 using the modified retrospective transition method. Information in this Note 3 with respect to our leases and lease-related costs and receivables is presented under Topic 842 as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 . Topic 842 sets out the principles for recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The primary impact of Topic 842 is the recognition of lease assets and liabilities on the balance sheet by lessees for leases classified as operating leases. The accounting applied by lessors is largely unchanged. As of January 1, 2019 and June 30, 2019 , the Company had no material ground leases or finance leases where the Company was a lessee and therefore did not record any right‑of-use asset or liability in its condensed consolidated balance sheet as of June 30, 2019 .

On the date of adoption, Brookfield DTLA elected the package of practical expedients provided for in Topic 842, including:

•
No reassessment of whether any expired or existing contracts were or contained leases;

•
No reassessment of the lease classification for any expired or existing leases; and

•
No reassessment of initial direct costs for any existing leases.

The package of practical expedients was made as a single election and was consistently applied to all existing leases as of January 1, 2019. The Company also elected the practical expedient provided to lessors in a subsequent amendment to Topic 842 that removed the requirement to separate lease and nonlease components, provided certain conditions were met.

Brookfield DTLA leases its office properties to lessees in exchange for payments from tenants comprised of monthly payments that cover rent, property taxes, insurance and certain cost recoveries. Payments from tenants for reimbursement are considered nonlease components that are separated from lease components and are generally accounted for in accordance with the revenue recognition standard. However, the Company qualified for and elected the practical expedient related to combining the components because the lease component is classified as an operating lease and the timing and pattern of transfer of tenant reimbursements, which is not the predominant component, is the same as the lease component. As such, consideration for tenant reimbursements is accounted for as part of the overall consideration in the lease. Lease income related to variable payments includes fixed and contingent rental payments and tenant recoveries. Tenant recoveries, including reimbursements of utilities, repairs and maintenance, common area expenses, real estate taxes and insurance, and other operating expenses, are recognized as part of lease income in the period during which the applicable expenses are incurred and the tenant’s obligation to reimburse us arises. Such payments from customers are considered nonlease components of the lease and therefore no consideration is allocated to them because they do not transfer a

13


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

good or service to the customer. Fixed contractual payments from the Company’s leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of lease income recognized during the period. Straight-line rental revenue is commenced when the customer assumes control of the leased premises. Deferred rent receivables represent the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.

Short-term parking revenues do not qualify for the single lease component practical expedient, discussed above, due to the difference in the timing and pattern of transfer of the Company’s parking service obligations and associated lease components within the same lease agreement. The Company recognizes short-term parking revenues in accordance with the revenue recognition accounting standard, ASC Topic 606, Revenue from Contracts with Customers , when the services are provided and the performance obligations are satisfied, which normally occurs at a point in time.

Some of the Company’s leases have termination and/or extension options. Termination options allow the tenant to terminate the lease prior to the end of the lease term under certain circumstances. Termination options generally become effective half way or further into the original lease term and require advance notification from the tenant and payment of a termination fee that reimburses the Company for a portion of the remaining rent under the original lease term and the undepreciated lease inception costs such as commissions, tenant improvements and lease incentives. Termination fees are recognized at the later of when the tenant has vacated the space or the lease has expired, and a fully executed lease termination agreement has been delivered, the amount of the fee is determinable and collectability of the fee is reasonably assured.

Rents, deferred rents and other receivables, net also includes amounts paid to a tenant for improvements owned or costs incurred by the tenant. Such amounts are treated as tenant inducements and are presented in the condensed consolidated balance sheet net of accumulated amortization. Amortization of tenant inducements is recorded on a straight-line basis over the term of the related lease as a reduction of lease income in the condensed consolidated statement of operations. The new standard also requires the Company to reduce its lease income for credit losses associated with lease receivables. In addition, straight-line rent receivables are written off when the Company believes there is uncertainty regarding a tenant’s ability to complete the term of the lease.

Topic 842 requires lessors to capitalize and amortize only incremental direct leasing costs. All leasing commissions paid in connection with new leases or lease renewals are capitalized and amortized on a straight-line basis over the initial fixed terms of the respective leases as part of depreciation and amortization in the condensed consolidated statement of operations. Initial direct costs, primarily commissions, related to the leasing of our office properties are deferred and are presented as deferred charges in the condensed consolidated balance sheet net of accumulated amortization totaling $55.9 million and $50.3 million as of June 30, 2019 and December 31, 2018 , respectively.


14


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Beginning January 1, 2019, any costs incurred by the Company to negotiate or arrange a lease regardless of its outcome, such as fixed employee compensation, tax or legal advice to negotiate lease terms, and lessor costs related to advertising or soliciting potential tenants are required to be expensed as incurred. During six months ended June 30, 2019 , Brookfield DTLA had no indirect leasing costs that would have been capitalized prior to the adoption of Topic 842.

The election of the package of practical expedients described above permits the Company to continue to account for its leases that commenced before January 1, 2019 under the previous lease accounting guidance for the remainder of their lease terms, and to apply the new lease accounting guidance to leases commencing or modified after January 1, 2019. The Company recorded no net cumulative effect adjustment to the accumulated deficit in the condensed consolidated balance sheet on January 1, 2019 as a result of the adoption of this guidance as there were no indirect leasing costs that were required to be written off.

Reclassification of Prior Period Presentation of Rental Income and Tenant Reimbursements

As described above, rental income and tenant reimbursements related to our operating leases for which Brookfield DTLA is the lessor qualified for the single component practical expedient and are classified as lease income in our condensed consolidated statement of operations. Prior to the adoption of Topic 842, the Company reported rental income and tenant reimbursements separately in the condensed consolidated statement of operations, in accordance with Topic 840. Upon adoption of the new lease accounting standard, the comparative statements of operations for prior years have been reclassified to conform to the new single component presentation of rental income and tenant reimbursements, classified within lease income in the Company’s condensed consolidated statement of operations.

As of June 30, 2019 , Brookfield DTLA has six Class A office properties and one retail center aggregating 7.6 million net building rentable square feet located in the LACBD. We are susceptible to adverse developments in the markets for office space, particularly in Southern California. Such adverse developments could include oversupply of or reduced demand for office space; declines in property values; business layoffs, downsizings, relocations or industry slowdowns affecting tenants of the Company’s properties; changing demographics; increased telecommuting; terrorist targeting of or acts of war against high-rise structures; infrastructure quality; California state budgetary constraints and priorities; increases in real estate and other taxes; costs of complying with state, local and federal government regulations or increased regulation and other factors. None of our tenants accounted for more than 10% of our lease income for the six months ended June 30, 2019 .

As of June 30, 2019 , all of the leases in which the Company is the lessor are classified as operating leases. Our leases generally contain options to extend lease terms at prevailing market rates at the time of expiration. Certain leases with retail tenants also provide for the payment by the lessee of additional rent based on a percentage of the tenant’s sales. Percentage rents are recognized only after the tenant sales thresholds have been achieved.


15


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

A reconciliation of the revenue line items that were reclassified in Brookfield DTLA’s condensed consolidated statements of operations to conform to the current period presentation pursuant to the adoption of Topic 842 and the election of the single component practical expedient is as follows (in thousands):

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Rental income
(presentation prior to January 1, 2019)
$
42,254

$
39,681

$
83,420

$
81,436

Tenant reimbursements
(presentation prior to January 1, 2019)
26,659

23,976

51,878

46,081

Lease income
(presentation effective January 1, 2019)
$
68,913

$
63,657

$
135,298

$
127,517


As of June 30, 2019 , the undiscounted cash flows for future minimum base rents to be received from tenants under executed noncancelable operating leases for future periods are as follows (in thousands):

Remainder of 2019
$
80,592

2020
162,629

2021
162,655

2022
149,017

2023
135,131

2024
116,551

Thereafter
598,963

$
1,405,538


The amounts shown in the table above do not include percentage rents. The Company recorded percentage rents totaling $0.3 million as part of lease income in the condensed consolidated statement of operations during the six months ended June 30, 2019 .

Brookfield DTLA’s lease income of $135.3 million fo r the six months ended June 30, 2019 , primarily represents revenue related to agreements for rental of our investments in real estate, subject to Topic 842. The Company’s leases do not have guarantees of residual value of the underlying assets. We manage risk associated with the residual value of our leased assets by carefully selecting our tenants and monitoring their credit quality throughout their respective lease terms. Upon the expiration or termination of a lease, the Company often has the ability to re-lease the space with an existing tenant or to a new tenant within a reasonable amount of time.


16


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

As of December 31, 2018 , the undiscounted cash flows for future minimum base rents to be received from tenants under executed noncancelable operating leases for future periods are as follows (in thousands):

2019
$
160,732

2020
162,373

2021
162,175

2022
147,958

2023
130,674

Thereafter
587,950

$
1,351,862


Note 4 —Investment in Unconsolidated Real Estate Joint Venture

As described in Note 1 “Organization and Description of Business,” on May 31, 2019 New OP entered into an agreement to contribute and transfer all of its wholly-owned interests in the Property Owner in exchange for noncontrolling interests in a newly formed joint venture, which resulted in the derecognition of the assets of 755 South Figueroa, a residential development property, from the Company’s condensed consolidated balance sheet.

As a result of the derecognition of assets, the Company recognized a gain representing the difference between the amount of consideration measured and allocated to the assets and their carrying amount as follows (in thousands):

Consideration
$
35,200

Investments in real estate, net
$
20,139

Cash and cash equivalents
73

Prepaid and other assets, net
11



Carrying amount
20,223

Gain from derecognition of assets
$
14,977


The Company’s interest in the joint venture as of May 31, 2019 was 54.3% while Brookfield DTLA FP IV Holdings LLC’s interest was 45.7% based on its $29.6 million cash contribution made in exchange for controlling interests in the joint venture. The gain from derecognition of assets is recognized in the condensed consolidated statements of operations for the three and six months ended June 30, 2019 .

In determining whether Brookfield DTLA has a controlling financial interest in an entity and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and Brookfield DTLA is the primary beneficiary.


17


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

A VIE is broadly defined as an entity where either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.

A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Brookfield DTLA qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE.

Consideration of various factors includes, but is not limited to, Brookfield DTLA’s ability to direct the activities that most significantly impact the VIE’s economic performance, its form of ownership interest, its representation on the VIE’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and its ability to replace the manager of and/or liquidate the entity.

The Company determined that the joint venture is a VIE mainly because its equity investment at risk is insufficient to finance the joint venture’s activities without additional subordinated financial support. While the joint venture meets the definition of a VIE, Brookfield DTLA is not its primary beneficiary as the Company lacks the power through voting or similar rights to direct the activities that most significantly impact the joint venture’s economic performance. Therefore, the Company accounts for its ownership interest in the joint venture under the equity method. Brookfield DTLA is required to continually evaluate its VIE relationships and consolidation conclusion.

The liabilities of the investment in unconsolidated real estate joint venture may only be settled using the assets of 755 South Figueroa and the liabilities of the joint venture are not recourse to the Company. The Company’s exposure to its investment in the joint venture is limited to its investment balance. The Company’s ownership interest in the joint venture is 54.3% as of June 30, 2019 . Pursuant to the operating agreement of the joint venture, the other venture partner may be required to fund additional amounts for the development of 755 South Figueroa, routine operating costs, and guaranties or commitments of the joint venture.


18


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 5—Rents, Deferred Rents and Other Receivables, Net

Brookfield DTLA’s rents, deferred rents and other receivables are comprised of the following (in thousands):

June 30, 2019
December 31, 2018
Straight-line and other deferred rents
$
117,625

$
115,445

Tenant inducements receivable
44,246

42,642

Other receivables
6,624

10,437

Rents, deferred rents and other receivables, gross
168,495

168,524

Less: accumulated amortization of tenant inducements
18,670

16,701

allowance for doubtful accounts
196

314

Rents, deferred rents and other receivables, net
$
149,629

$
151,509


Note 6—Intangible Assets and Liabilities

Brookfield DTLA’s intangible assets and liabilities are summarized as follows (in thousands):

June 30, 2019
December 31, 2018
Intangible Assets
In-place leases
$
66,365

$
66,365

Tenant relationships
30,078

30,078

Above-market leases
31,270

31,270

Intangible assets, gross
127,713

127,713

Less: accumulated amortization
90,066

83,073

Intangible assets, net
$
37,647

$
44,640

Intangible Liabilities
Below-market leases
$
59,561

$
59,561

Less: accumulated amortization
48,892

47,107

Intangible liabilities, net
$
10,669

$
12,454



19


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The impact of the amortization of acquired below-market leases, net of acquired above-market leases, on lease income and of acquired in-place leases and tenant relationships on depreciation and amortization expense is as follows (in thousands):

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Lease income
$
137

$
(278
)
$
(622
)
$
(73
)
Depreciation and amortization expense
1,888

2,360

4,586

5,175


As of June 30, 2019 , the estimate of the amortization/accretion of intangible assets and liabilities for future periods is as follows (in thousands):

In-Place
Leases
Other
Intangible Assets
Intangible
Liabilities
Remainder of 2019
$
3,170

$
2,083

$
1,910

2020
4,666

2,985

2,987

2021
4,215

2,927

2,544

2022
3,544

2,702

2,229

2023
2,091

2,328

674

2024
1,200

2,202

125

Thereafter
1,559

1,975

200

$
20,445

$
17,202

$
10,669



20


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 7 — Mortgage Loans

Brookfield DTLA’s debt is as follows (in thousands, except dates and percentage amounts):

Contractual
Maturity Date
Principal Amount as of
Interest Rate
June 30, 2019
December 31, 2018
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–North Tower (1)
10/9/2020
4.05
%
$
400,000

$
400,000

Wells Fargo Center–North Tower (2)
10/9/2020
6.40
%
65,000

65,000

Wells Fargo Center–North Tower (3)
10/9/2020
7.40
%
35,000

35,000

Wells Fargo Center–South Tower (4)
11/4/2021
4.24
%
258,186

258,186

777 Tower (5)
11/1/2019
4.62
%
220,000

220,000

EY Plaza (6)
11/27/2020
6.99
%
35,000

35,000

Total variable-rate loans
1,013,186

1,013,186

Variable-Rate Swapped to Fixed-Rate Loan:
EY Plaza (7)
11/27/2020
3.90
%
230,000

230,000

Total floating-rate debt
1,243,186

1,243,186

Fixed-Rate Debt:
BOA Plaza
9/1/2024
4.05
%
400,000

400,000

Gas Company Tower
8/6/2021
3.47
%
319,000

319,000

Gas Company Tower
8/6/2021
6.50
%
131,000

131,000

Figat7th
3/1/2023
3.88
%
58,500

58,500

Total fixed-rate debt
908,500

908,500

Total debt
2,151,686

2,151,686

Less: unamortized debt issuance costs
8,485

10,962

Total debt, net
$
2,143,201

$
2,140,724

__________
(1)
This loan bears interest at LIBOR plus 1.65% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity dates of both of the mezzanine loans are extended when the maturity date of the mortgage loan is extended.
(2)
This loan bears interest at LIBOR plus 4.00% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity date of the other mezzanine loan is extended when the maturity date of the mortgage loan is extended.
(3)
This loan bears interest at LIBOR plus 5.00% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity date of the other mezzanine loan is extended when the maturity date of the mortgage loan is extended.

21


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

(4)
This loan bears interest at LIBOR plus 1.80% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.50% . Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of one year. As of June 30, 2019 , a future advance amount of $31.8 million is available under this loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.
(5)
This loan bears interest at LIBOR plus 2.18% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 5.75% . Brookfield DTLA has one option to extend the maturity date of this loan for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of June 30, 2019 , we did not meet the criteria specified in the loan agreement to extend this loan. See “Debt Maturities—777 Tower” below.
(6)
This loan bears interest at LIBOR plus 4.55% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 3.50% .
(7)
This loan bears interest at LIBOR plus 1.65% . As required by the loan agreement, we have entered into interest rate swap contracts to hedge this loan, which effectively fix the LIBOR portion of the interest rate at 2.29% . The effective interest rate of 3.90% includes interest on the swaps.

The weighted average interest rate of our debt was 4.35% and 4.34% as of June 30, 2019 and December 31, 2018 , respectively.

Debt Maturities

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. As of June 30, 2019 , our debt to be repaid in future periods is as follows (in thousands):

Remainder of 2019
$
220,000

2020
765,000

2021
708,186

2022
—

2023
58,500

2024
400,000

$
2,151,686


As of June 30, 2019 , $485.0 million of our debt may be prepaid without penalty, $400.0 million may be defeased (as defined in the underlying loan agreement), $1,208.2 million may be prepaid with prepayment penalties, and $58.5 million is locked out from prepayment until March 1, 2020 .


22


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

777 Tower—

Brookfield DTLA currently intends to refinance the mortgage loan secured by the 777 Tower office property on or about November 1, 2019 , its scheduled maturity date. As of June 30, 2019 , we did not meet the criteria specified in the loan agreement to extend the maturity date of this loan. As of June 30, 2019 , the Company does not expect to make a principal paydown when the loan is refinanced (based on current market conditions). There can be no assurance that this refinancing can be accomplished or what terms will be available in the market for this type of financing at the time of any refinancing.

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $2.2 billion of mortgage debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. In connection with all of these loans, Brookfield DTLA entered into “non-recourse carve out” guarantees, which provide for these otherwise non-recourse loans to become partially or fully recourse against DTLA Holdings or one of its subsidiaries, if certain triggering events (as defined in the loan agreements) occur.

Debt Reporting Compliance

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended June 30, 2019 and were in compliance with the amounts required by the loan agreements.

Note 8—Accounts Payable and Other Liabilities

Brookfield DTLA’s accounts payable and other liabilities are comprised of the following (in thousands):

June 30, 2019
December 31, 2018
Tenant improvements and inducements payable
$
32,559

$
27,862

Unearned rent and tenant payables
17,696

17,077

Accrued capital expenditures and leasing commissions
15,347

9,844

Accrued expenses and other liabilities
6,332

8,895

Accounts payable and other liabilities
$
71,934

$
63,678



23


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 9 —Mezzanine Equity

Mezzanine equity in the condensed consolidated balance sheets is comprised of the Series A preferred stock, a Series A-1 preferred interest, a senior participating preferred interest, and a Series B preferred interest (collectively, the “Preferred Interests”). The Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest are held by a noncontrolling interest holder. The Preferred Interests are classified in mezzanine equity because they are callable, and the holder of the Series A-1 preferred interest, senior participating preferred interest, Series B preferred interest, and some of the Series A preferred stock indirectly controls the ability to elect to redeem such instruments, through its controlling interest in the Company and its subsidiaries. There is no commitment or obligation on the part of Brookfield DTLA or DTLA Holdings to redeem the Preferred Interests.

The Preferred Interests included within mezzanine equity were recorded at fair value on the date of issuance and have been adjusted to the greater of their carrying amount or redemption value as of June 30, 2019 and December 31, 2018 .

Series A Preferred Stock

As of June 30, 2019 and December 31, 2018 , 9,730,370 shares of Series A preferred stock were outstanding, of which 9,357,469 shares were issued to third parties and 372,901 shares were issued to DTLA Fund Holding Co., a subsidiary of DTLA Holdings.

No dividends were declared on the Series A preferred stock during the six months ended June 30, 2019 and 2018 . Dividends on the Series A preferred stock are cumulative, and therefore, will continue to accrue at an annual rate of $1.90625 per share.

The Series A preferred stock does not have a stated maturity and is not subject to any sinking fund or mandatory redemption provisions. Upon liquidation, dissolution or winding up, the Series A preferred stock will rank senior to our common stock with respect to the payment of distributions. We may, at our option, redeem the Series A preferred stock, in whole or in part, for cash at a redemption price of $25.00 per share, plus all accumulated and unpaid dividends on such Series A preferred stock up to and including the redemption date. The Series A preferred stock is not convertible into or exchangeable for any other property or securities of Brookfield DTLA.

As of June 30, 2019 , the Series A preferred stock is reported at its redemption value of $419.2 million calculated using the redemption price of $25.00 per share plus $175.9 million of accumulated and unpaid dividends on such Series A preferred stock through June 30, 2019 .

Series A-1 Preferred Interest

The Series A-1 preferred interest is held by DTLA Holdings or wholly-owned subsidiaries of DTLA Holdings. Interest on the Series A-1 preferred interest is cumulative and accrues at an annual rate of 7.625% .


24


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

As of June 30, 2019 , the Series A-1 preferred interest is reported at its redemption value of $409.4 million calculated using its liquidation value of $225.7 million plus $183.7 million of unpaid interest on such Series A-1 preferred interest through June 30, 2019 .

Senior Participating Preferred Interest

Brookfield DTLA Fund Properties III LLC (“DTLA OP”) issued a senior participating preferred interest to DTLA Holdings in connection with the formation of Brookfield DTLA and the MPG acquisition. The senior participating preferred interest represents a 4.0% participating interest in the residual value of DTLA OP.

During the six months ended June 30, 2018 , Brookfield DTLA made distributions totaling $2.0 million to DTLA Holdings as returns of investment related to the senior participating preferred interest using cash on hand.

As of June 30, 2019 , the senior participating preferred interest is reported at its redemption value of $22.7 million using the value of the participating interest.

Series B Preferred Interest

At the time of the merger with MPG, DTLA Holdings made a commitment to make capital contributions in cash or property to New OP, which directly or indirectly owns the Brookfield DTLA properties, to fund up to $260.0 million of its future cash needs, for which it will be entitled to receive a market rate of return determined at the time of contribution (“preferred return”).

During the six months ended June 30, 2019 , the Company received cash contributions totaling $27.4 million from DTLA Holdings under this commitment, which are entitled to a 9.0% preferred return. The Company used the funds for capital expenditures and leasing costs. As of June 30, 2019 , $57.8 million is available to the Company under this commitment for future funding.

During the six months ended June 30, 2019 , Brookfield DTLA made distributions to DTLA Holdings totaling $2.7 million as preferred returns on the Series B preferred interest using cash on hand. During the six months ended June 30, 2018 , Brookfield DTLA made distributions totaling $12.5 million to DTLA Holdings as preferred returns on the Series B preferred interest using cash on hand.

As of June 30, 2019 , the Series B preferred interest is reported at its redemption value of $215.1 million calculated using its liquidation value of $202.2 million plus $12.9 million of unpaid preferred returns on such Series B preferred interest through June 30, 2019 .


25


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Change in Mezzanine Equity

A summary of the change in mezzanine equity is as follows (in thousands, except share amounts):

Number of
Shares of
Series A
Preferred
Stock
Series A
Preferred
Stock
Noncontrolling Interests
Total
Mezzanine
Equity
Series A-1
Preferred
Interest
Senior
Participating
Preferred
Interest
Series B
Preferred
Interest
Balance, December 31, 2018
9,730,370

$
409,932

$
400,816

$
23,443

$
181,698

$
1,015,889

Issuance of Series B preferred interest
6,400

6,400

Dividends
4,637

4,637

Preferred returns
4,303

4,091

8,394

Redemption measurement adjustment
(572
)
(572
)
Balance, March 31, 2019
9,730,370

414,569

405,119

22,871

192,189

1,034,748

Issuance of Series B preferred interest
21,000

21,000

Dividends
4,637

4,637

Distributions to noncontrolling interests
(2,695
)
(2,695
)
Preferred returns
4,303

4,591

8,894

Redemption measurement adjustment
(179
)
(179
)
Balance, June 30, 2019
9,730,370

$
419,206

$
409,422

$
22,692

$
215,085

$
1,066,405


Number of
Shares of
Series A
Preferred
Stock
Series A
Preferred
Stock
Noncontrolling Interests
Total
Mezzanine
Equity
Series A-1
Preferred
Interest
Senior
Participating
Preferred
Interest
Series B
Preferred
Interest
Balance, December 31, 2017
9,730,370

$
391,400

$
383,510

$
25,548

$
190,291

$
990,749

Dividends
4,637

4,637

Preferred returns
4,303

3,879

8,182

Distributions to noncontrolling interests
(1,043
)
(3,527
)
(4,570
)
Redemption measurement adjustment
1,657

1,657

Balance, March 31, 2018
9,730,370

396,037

387,813

26,162

190,643

1,000,655

Dividends
4,637

4,637

Preferred returns
4,303

3,921

8,224

Distributions to noncontrolling interests
(982
)
(8,931
)
(9,913
)
Redemption measurement adjustment
768

768

Balance, June 30, 2018
9,730,370

$
400,674

$
392,116

$
25,948

$
185,633

$
1,004,371



26


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 10—Stockholders’ Deficit

During the six months ended June 30, 2019 , Brookfield DTLA received contributions to additional paid-in capital totaling $0.5 million from DTLA Holdings, which were used for general corporate purposes.

Note 11—Noncontrolling Interests

Mezzanine Equity Component

The Series A-1 preferred interest, senior participating preferred interest and Series B preferred interest consist of equity interests of New OP, DTLA OP and New OP, respectively, which are owned directly by DTLA Holdings. These noncontrolling interests are presented as mezzanine equity in the condensed consolidated balance sheet. See Note 9 “Mezzanine Equity.”

Stockholders’ Deficit Component

The Series B common interest ranks junior to the Series A preferred stock as to dividends and upon liquidation and is presented in the condensed consolidated balance sheet as noncontrolling interest.

Note 12—Accumulated Other Comprehensive (Loss) Income

A summary of the change in accumulated other comprehensive (loss) income related to Brookfield DTLA’s derivative financial instruments designated as cash flow hedges is as follows (in thousands):

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Balance at beginning of period
$
(1,051
)
$
(70
)
$
(224
)
$
(574
)
Other comprehensive (loss) income
before reclassifications
(1,561
)
835

(2,388
)
2,537

Amounts reclassified from accumulated
other comprehensive loss
—

—

—

(1,198
)
Net current-period other
comprehensive (loss) income
(1,561
)
835

(2,388
)
1,339

Balance at end of period
$
(2,612
)
$
765

$
(2,612
)
$
765



27


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 13 —Income Taxes

Income Taxes

Brookfield DTLA has elected to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income.

Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to both federal and state income taxes. Our TRS did not have significant tax provisions during the six months ended June 30, 2019 and 2018 .

Qualification and taxation as a REIT depends upon Brookfield DTLA’s ability to meet the various qualification tests imposed under the Code related to annual operating results, asset diversification, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that Brookfield DTLA will be organized or be able to operate in a manner so as to continue to qualify or remain qualified as a REIT. If Brookfield DTLA fails to qualify as a REIT in any taxable year, we will be subject to federal and state income tax on our taxable income at regular corporate tax rates, and we may be ineligible to qualify as a REIT for four subsequent tax years. Brookfield DTLA may be subject to certain state or local income taxes, or franchise taxes on its REIT activities. Brookfield DTLA’s taxable income or loss is different than its financial statement income or loss.

Uncertain Tax Positions

Brookfield DTLA recognizes tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more likely than not recognition threshold. Brookfield DTLA has no unrecognized tax benefits as of June 30, 2019 and December 31, 2018 , and does not expect its unrecognized tax benefits balance to change during the next 12 months. As of June 30, 2019 , Brookfield DTLA’s 2013 tax period and 2014, 2015, 2016 and 2017 tax years remain open due to the statute of limitations and may be subject to examination by federal, state and local authorities.


28


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 14 —Fair Value Measurements

The valuation of Brookfield DTLA’s derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the derivatives. These analyses reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. We have incorporated credit valuation adjustments to appropriately reflect both our own and the respective counterparty’s non-performance risk in the fair value measurements.

Brookfield DTLA’s (liabilities) assets measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, are as follows (in thousands):

Fair Value Measurements Using
Total
Fair
Value
Quoted Prices in
Active Markets
for Identical
(Liabilities) Assets
(Level 1)
Significant
Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Interest rate swaps at:
June 30, 2019
$
(1,414
)
$
—

$
(1,414
)
$
—

December 31, 2018
974

—

974

—


Note 15 — Financial Instruments

Derivative Financial Instruments

A summary of the fair value of Brookfield DTLA’s derivative financial instruments is as follows (in thousands):

Fair Value as of
June 30, 2019
December 31, 2018
Derivatives designated as hedging instruments:
Interest rate swap assets
$
—

$
974

Interest rate swap liabilities
(1,414
)
—


Interest rate swap assets are included in prepaid and other assets, net and interest rate swap liabilities are included in accounts payable and other liabilities in the condensed consolidated balance sheet.


29


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

A summary of the effect of derivative financial instruments reported in the condensed consolidated financial statements is as follows (in thousands):

Amount of
(Loss) Gain
Recognized in AOCL
Amount of Gain
Reclassified from
AOCL to Statement
of Operations
Derivatives designated as hedging instruments:
Interest rate swaps for the six months ended:
June 30, 2019
$
(2,388
)
$
—

June 30, 2018
2,537

1,198


The gain reclassified from accumulated other comprehensive loss during the six months ended June 30, 2018 is included as part of interest and other revenue in the condensed consolidated statement of operations.

Interest Rate Swaps—

As of June 30, 2019 , Brookfield DTLA held the following interest rate swap contracts pursuant to the terms of the EY Plaza mortgage loan agreement (in thousands, except percentages and dates):

Notional
Amount
Swap
Rate
LIBOR
Spread
Effective
Interest
Rate
Expiration
Date
Interest rate swap
$
170,403

2.18
%
1.65
%
3.83
%
11/2/2020
Interest rate swap
54,206

2.47
%
1.65
%
4.12
%
11/2/2020
$
224,609

2.29
%
1.65
%
3.90
%

Interest Rate Caps—

Brookfield DTLA holds interest rate cap contracts pursuant to the terms of certain of its mortgage and mezzanine loan agreements with the following notional amounts (in thousands):

June 30, 2019
December 31, 2018
Wells Fargo Center–North Tower
$
400,000

$
400,000

Wells Fargo Center–North Tower
65,000

65,000

Wells Fargo Center–North Tower
35,000

35,000

Wells Fargo Center–South Tower
290,000

290,000

777 Tower
220,000

220,000

EY Plaza
35,000

35,000

$
1,045,000

$
1,045,000



30


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Other Financial Instruments

The estimated fair value and carrying amount of Brookfield DTLA’s mortgage and mezzanine loans are as follows (in thousands):

June 30, 2019
December 31, 2018
Estimated fair value
$
2,150,106

$
2,142,813

Carrying amount
2,151,686

2,151,686


The Company estimates the fair value of its mortgage and mezzanine loans by calculating the credit-adjusted present value of principal and interest payments for each loan. The calculation incorporates observable market interest rates, which management considers to be Level 2 inputs, assumes that each loan will be outstanding until maturity, and excludes any options to extend the maturity date of the loan available per the terms of the loan agreement, if any.


31


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Note 16—Related Party Transactions

Management Agreements

Certain subsidiaries of Brookfield DTLA have entered into arrangements with the Manager, pursuant to which the Manager provides property management and various other services. Property management fees under the management agreements entered into in connection with these arrangements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays the Manager an asset management fee, which is calculated based on 0.75% of the capital contributed by DTLA Holdings. Leasing management fees paid to the Manager range from 1.00% to 4.00% of expected rents, depending on the terms of the lease and whether a third-party broker was paid a commission for the transaction. Construction management fees are paid to the Manager based on 3.00% of hard and soft construction costs. Development management fees are paid to the Manager and Brookfield affiliates by the unconsolidated joint venture based on 3.00% of hard and soft construction costs.

A summary of costs incurred by the applicable Brookfield DTLA subsidiaries under these arrangements is as follows (in thousands):

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Property management fee expense
$
2,106

$
1,993

$
4,157

$
3,925

Asset management fee expense
1,582

1,582

3,165

3,165

Leasing and construction management fees
763

634

2,075

917

Development management fees (1)
264

—

264

—

General, administrative and
reimbursable expenses
954

851

1,440

1,249

__________
(1)
Amounts presented are calculated by applying the Company’s ownership interest percentage in the unconsolidated joint venture as of period end to the amounts capitalized during each of the periods presented.


32


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Insurance Agreements

Properties held by certain Brookfield DTLA subsidiaries and affiliates are covered under insurance policies entered into by the Manager. Insurance premiums for Brookfield DTLA’s properties are paid by the Manager. Brookfield DTLA reimburses the Manager for the amount of fees and expenses related to such policies that have been allocated to the Company’s properties as determined by the Manager in its reasonable discretion taking into consideration certain facts and circumstances, including the value of the Company’s properties.

A summary of costs incurred by the applicable Brookfield DTLA subsidiaries and affiliates under this arrangement is as follows (in thousands):

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Insurance expense
$
2,193

$
1,972

$
4,391

$
3,927


Other Related Party Transactions with BAM Affiliates

A summary of the impact of other related party transactions with BAM affiliates on the Company’s condensed consolidated statement of operations is as follows (in thousands):

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Lease income
$
817

$
537

$
1,426

$
957

Interest and other revenue
105


—


105


—

Rental property operating and
maintenance expense
70

231

285

455

Other expense
77

—

77

—


Note 17—Commitments and Contingencies

Brookfield DTLA and its subsidiaries may be subject to pending legal proceedings and litigation incidental to its business. After consultation with legal counsel, management believes that any liability that may potentially result upon resolution of such matters is not expected to have a material adverse effect on the Company’s business, financial condition or consolidated financial statements as a whole.


33

Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.

BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto that appear in Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could ultimately differ from such estimates. The results of operations for interim periods are not necessarily indicative of those that may be expected for a full fiscal year. Certain prior year balances have been reclassified in order to conform to the current year presentation.

Overview and Background

Brookfield DTLA Fund Office Trust Investor Inc. (“Brookfield DTLA” or the “Company”) is a Maryland corporation and was incorporated on April 19, 2013. Brookfield DTLA was formed for the purpose of consummating the transactions contemplated in the Agreement and Plan of Merger dated as of April 24, 2013, as amended (the “Merger Agreement”), and the issuance of shares of 7.625% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred stock”) in connection with the acquisition of MPG Office Trust, Inc. and MPG Office, L.P. (together, “MPG”). Brookfield DTLA is a direct subsidiary of Brookfield DTLA Holdings LLC, a Delaware limited liability company (“DTLA Holdings”, and together with its affiliates excluding the Company and its subsidiaries, the “Manager”). DTLA Holdings is an indirect partially-owned subsidiary of Brookfield Property Partners L.P., an exempted limited partnership under the Laws of Bermuda (“BPY”), which in turn is the flagship commercial property entity and the primary vehicle through which Brookfield Asset Management Inc., a corporation under the Laws of Canada (“BAM”) invests in real estate on a global basis.

As of June 30, 2019 and December 31, 2018 , Brookfield DTLA owned BOA Plaza, EY Plaza, Wells Fargo Center–North Tower, Wells Fargo Center–South Tower, Gas Company Tower and 777 Tower, which are Class A office properties, and Figat7th, a retail center nested between EY Plaza and 777 Tower, all of which are located in the Los Angeles Central Business District (the “LACBD”).

34


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

On May 31, 2019 , Brookfield DTLA Fund Properties II LLC, a wholly-owned subsidiary of the Company (“New OP”), entered into an agreement to contribute and transfer all of its wholly-owned interests in Brookfield DTLA 4050/755 Inc. (the “Property Owner”), the indirect property owner of 755 South Figueroa, a residential development property, in exchange for noncontrolling interests in a newly formed joint venture. See Item 1. “Financial Statements—Notes to Condensed Consolidated Financial Statements—Note 4 Investment in Unconsolidated Real Estate Joint Venture.”

Brookfield DTLA receives its income primarily from lease income generated from the operations of its office and retail properties, and to a lesser extent, income from its parking garages.

Brookfield DTLA has elected to be taxed as a real estate investment trust (“REIT”) pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax period ended December 31, 2013. Brookfield DTLA conducts and intends to conduct its operations so as to continue to qualify as a REIT. Accordingly, Brookfield DTLA is not subject to U.S. federal income tax, provided that it continues to qualify as a REIT and distributions to its stockholders, if any, generally equal or exceed its taxable income. Brookfield DTLA has elected to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as non-customary services for our tenants, and holding assets that we cannot hold directly. A TRS is subject to both federal and state income taxes.

Liquidity and Capital Resources

General

Brookfield DTLA’s business requires continued access to adequate cash to fund its liquidity needs. The amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover its operating, financing and investing activities, resulting in “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease, or that it will not increase, in the future. If Brookfield DTLA’s operating cash flow and capital are not sufficient to cover its operating costs or to repay its indebtedness as it comes due, we may issue additional debt and/or equity, including to affiliates of Brookfield DTLA, which issuances could further adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock. In many cases, such securities may be issued if authorized by the board of directors of Brookfield DTLA without the approval of holders of the Series A preferred stock. See “—Potential Uses of Liquidity—Property Operations” below.


35


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Sources and Uses of Liquidity

Brookfield DTLA’s potential liquidity sources and uses are, among others, as follows:

Sources
Uses
•
Cash on hand;
•
Property operations;
•
Cash generated from operations;
•
Capital expenditures;
•
Contributions from noncontrolling
interests;
•
Payments in connection with loans; and
•
Other contributions; and
•
Distributions to noncontrolling interests.
•
Proceeds from additional secured or
unsecured debt financings.


Potential Sources of Liquidity —

Cash on Hand —

As of June 30, 2019 and December 31, 2018 , Brookfield DTLA had cash and cash equivalents totaling $46.9 million and $80.4 million , respectively.

Cash Generated from Operations —

Brookfield DTLA’s cash generated from operations is primarily dependent upon (1) the occupancy level of its portfolio, (2) the rental rates achieved on its leases, and (3) the collectability of rent and other amounts billed to its tenants. Net cash generated from operations is tied to the level of operating expenses, described below under “—Potential Uses of Liquidity.”


36


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Occupancy levels. The following table presents leasing information for executed leases at Brookfield DTLA’s properties as of June 30, 2019 :

Square Feet
Property
Net
Building
Rentable
% of Net
Rentable
%
Leased
Total
Annualized
Rents (1)
Annualized
Rent
$/RSF (2)
BOA Plaza
1,405,428

18.5
%
91.6
%
$
33,710,393

$
26.17

Wells Fargo Center–North Tower
1,400,639

18.5
%
87.5
%
34,215,662

27.91

Gas Company Tower
1,345,163

17.8
%
87.6
%
30,714,120

26.06

EY Plaza
963,682

12.7
%
82.2
%
20,564,787

25.97

Figat7th
316,250

4.2
%
89.6
%
6,064,214

21.40

Wells Fargo Center–South Tower
1,124,960

14.8
%
72.2
%
21,618,415

26.62

777 Tower
1,024,835

13.5
%
75.3
%
20,876,526

27.04

7,580,957

100.0
%
83.8
%
$
167,764,117

$
26.41

__________
(1)
Annualized rent represents the annualized monthly contractual rent under executed leases as of June 30, 2019 . This amount reflects total base rent before any rent abatements as of June 30, 2019 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for executed leases as of June 30, 2019 for the twelve months ending June 30, 2020 are approximately $10.8 million , or $1.69 per leased square foot.
(2)
Annualized rent per rentable square foot represents annualized rent as computed above, divided by leased square feet as of June 30, 2019 .


37


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following table presents a summary of lease expirations at Brookfield DTLA’s properties for executed leases as of June 30, 2019 , plus currently available space, for future periods. This table assumes that none of our tenants will exercise renewal options or early termination rights, if any, at or prior to their scheduled expirations.

Year
Total Area in
Square Feet
Covered by
Expiring
Leases
Percentage
of Leased
Square Feet
Annualized
Rent (1)
Percentage of
Annualized
Rent
Current
Rent per
Leased
Square
Foot (2)
Rent per
Leased Square
Foot at
Expiration (3)
Remainder of 2019
150,470

2.4
%
$
3,952,992

2.4
%
$
26.27

$
26.09

2020
358,837

5.6
%
9,915,565

5.9
%
27.63

27.98

2021
384,899

6.0
%
10,480,149

6.1
%
27.23

28.75

2022
381,831

6.0
%
10,509,759

6.3
%
27.52

29.81

2023
899,982

14.2
%
22,036,500

13.1
%
24.49

27.72

2024
551,431

8.7
%
15,190,882

9.1
%
27.55

32.01

2025
742,052

11.7
%
20,228,134

12.1
%
27.26

32.10

2026
645,854

10.2
%
15,624,223

9.3
%
24.19

29.45

2027
194,603

3.1
%
5,273,199

3.1
%
27.10

35.27

2028
20,645

0.3
%
598,188

0.4
%
28.97

39.45

Thereafter
2,021,396

31.8
%
53,954,526

32.2
%
26.69

40.27

Total expiring leases
6,352,000

100.0
%
$
167,764,117

100.0
%
$
26.41

$
33.21

Currently available
1,228,957

Total rentable square feet
7,580,957

__________
(1)
Annualized rent represents the annualized monthly contractual rent under executed leases as of June 30, 2019 . This amount reflects total base rent before any rent abatements as of June 30, 2019 and is shown on a net basis; thus, for any tenant under a partial gross lease, the expense stop, or under a fully gross lease, the current year operating expenses (which may be estimates as of such date), are subtracted from gross rent. Total abatements for executed leases as of June 30, 2019 for the twelve months ending June 30, 2020 are approximately $10.8 million , or $1.69 per leased square foot.
(2)
Current rent per leased square foot represents base rent for executed leases, divided by total leased square feet as of June 30, 2019 .
(3)
Rent per leased square foot at expiration represents base rent, including any future rent steps, and thus represents the base rent that will be in place at lease expiration.

Rental Rates and Leasing Activity. Average asking net effective rents in the LACBD were essentially flat during the six months ended June 30, 2019 . Management believes that on average our current rents are at market in the LACBD.


38


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The following table summarizes leasing activity at Brookfield DTLA’s properties for the six months ended June 30, 2019 :

Leasing Activity
Percentage Leased
Leased square feet as of December 31, 2018
6,493,480

86.3
%
Expirations
(604,438
)
(8.0
)%
New leases
64,007

0.9
%
Renewals
350,781

4.6
%
Remeasurement adjustments
48,170

—
%
Leased square feet as of June 30, 2019
6,352,000

83.8
%

Collectability of rent from our tenants. Brookfield DTLA’s lease income depends on collecting rent from its tenants, and in particular from its major tenants. In the event of tenant defaults, Brookfield DTLA may experience delays in enforcing its rights as landlord and may incur substantial costs in pursuing legal possession of the tenant’s space and recovery of any amounts due from the tenant. This is particularly true in the case of the bankruptcy or insolvency of a major tenant or where the Federal Deposit Insurance Corporation is acting as receiver.

Contributions from Noncontrolling Interests —

At the time of the merger with MPG, DTLA Holdings made a commitment to contribute up to $260.0 million in cash or property to New OP, which directly or indirectly owns the Brookfield DTLA properties, for which it will be entitled to receive a market rate of return determined at the time of contribution (“preferred return”).

During the six months ended June 30, 2019 , the Company received cash contributions totaling $27.4 million from DTLA Holdings under this commitment, which are entitled to a 9.0% preferred return as part of the Series B preferred interest. The Company used the funds for capital expenditures and leasing costs. As of June 30, 2019 and through the date of this report, $57.8 million is available to the Company under this commitment for future funding.

Other Contributions—

In addition to the amounts received under the commitment described above, during the six months ended June 30, 2019 the Company received contributions to additional paid-in capital totaling $0.5 million from DTLA Holdings that were used for general corporate purposes.


39


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Proceeds from Additional Secured or Unsecured Debt Financings—

Wells Fargo Center–South Tower—

As of June 30, 2019 and through the date of this report, a future advance amount of $31.8 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.

Potential Uses of Liquidity —

The following are the projected uses, and some of the potential uses, of cash in the near term.

Property Operations —

Brookfield DTLA’s business requires continued access to adequate cash to fund its liquidity needs. The amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover its operating, financing and investing activities, resulting in “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease, or that it will not increase, in the future. Should the cash generated by Brookfield DTLA’s properties not be sufficient to fund their operations, such cash would be provided by DTLA Holdings or another source of funds available to the Company or, if such cash were not made available, the Company might not have sufficient cash to fund its operations.

Capital Expenditures and Leasing Costs —

Capital expenditures fluctuate in any given period, subject to the nature, extent and timing of improvements required to maintain Brookfield DTLA’s properties. Leasing costs also fluctuate in any given period, depending upon such factors as the type of property, the length of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

Brookfield DTLA expects that capital improvements and leasing activities at its properties will require material amounts of cash for at least several years. Brookfield DTLA projects spending approximately $311 million over the next five years consisting of $53 million for capital expenditures, $168 million for tenant improvements, and $90 million for leasing costs. The expected capital improvements include, but are not limited to, renovations and physical capital upgrades to Brookfield DTLA’s properties, such as atrium renovations at Wells Fargo Center, upgrades to fire alarm, security and HVAC systems, elevator upgrades, parking structure improvements, and roof replacements.

As of June 30, 2019 and through the date of this report, a future advance amount of $31.8 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.


40


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Payments in Connection with Loans —

Debt Maturities—

As Brookfield DTLA’s debt matures, principal payment obligations present significant future cash requirements. Brookfield DTLA currently intends to refinance the mortgage loan secured by the 777 Tower office property on or about November 1, 2019 , its scheduled maturity date. As of June 30, 2019 , we did not meet the criteria specified in the loan agreement to extend the maturity date of this loan. As of June 30, 2019 , the Company does not expect to make a principal paydown when the loan is refinanced (based on current market conditions). There can be no assurance that this refinancing can be accomplished or what terms will be available in the market for this type of financing at the time of any refinancing.

Distributions to Noncontrolling Interests —

During the six months ended June 30, 2019 , Brookfield DTLA made distributions to DTLA Holdings totaling $2.7 million as preferred returns on the Series B preferred interest using cash on hand. During the six months ended June 30, 2018 , Brookfield DTLA made distributions to DTLA Holdings totaling $12.5 million as preferred returns on the Series B preferred interest and $2.0 million as returns of investment related to the senior participating preferred interest using cash on hand.

Indebtedness

As of June 30, 2019 , Brookfield DTLA’s debt was comprised of mortgage and mezzanine loans secured by seven properties. A summary of our debt as of June 30, 2019 is as follows (in millions, except percentage amounts and years):

Principal
Amount
Percent of
Total Debt
Effective
Interest
Rate
Weighted Average
Term to
Maturity
Fixed-rate
$
908.5

42
%
4.19
%
4 years
Variable-rate swapped to fixed-rate
230.0

11
%
3.90
%
1 year
Variable-rate (1)
1,013.2

47
%
4.59
%
1 year
$
2,151.7

100
%
4.35
%
2 years
__________
(1)
As of June 30, 2019 and through the date of this report, a future advance amount of $31.8 million is available under the Wells Fargo Center–South Tower mortgage loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.


41


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Certain information with respect to our indebtedness as of June 30, 2019 is as follows (in thousands, except percentage amounts and dates):

Interest
Rate
Contractual
Maturity Date
Principal
Amount
Annual Debt
Service (1)
Floating-Rate Debt
Variable-Rate Loans:
Wells Fargo Center–North Tower (2)
4.05
%
10/9/2020
$
400,000

$
16,405

Wells Fargo Center–North Tower (3)
6.40
%
10/9/2020
65,000

4,215

Wells Fargo Center–North Tower (4)
7.40
%
10/9/2020
35,000

2,624

Wells Fargo Center–South Tower (5)
4.24
%
11/4/2021
258,186

11,099

777 Tower (6)
4.62
%
11/1/2019
220,000

10,305

EY Plaza (7)
6.99
%
11/27/2020
35,000

2,481

Total variable-rate loans
1,013,186

47,129

Variable-Rate Swapped to Fixed-Rate
Loan:
EY Plaza (8)
3.90
%
11/27/2020
230,000

9,099

Total floating-rate debt
1,243,186

56,228

Fixed-Rate Debt
BOA Plaza
4.05
%
9/1/2024
400,000

16,425

Gas Company Tower
3.47
%
8/6/2021
319,000

11,232

Gas Company Tower
6.50
%
8/6/2021
131,000

8,633

Figat7th
3.88
%
3/1/2023
58,500

2,301

Total fixed-rate rate debt
908,500

38,591

Total debt
2,151,686

$
94,819

Less: unamortized debt issuance costs
8,485

Total debt, net
$
2,143,201

__________
(1)
Annual debt service for variable-rate loans is calculated using the one-month LIBOR rate in place on the debt as of June 30, 2019 plus the contractual spreads per the loan agreements. Annual debt service for fixed-rate loans is calculated based on contractual interest rates per the loan agreements.
(2)
This loan bears interest at LIBOR plus 1.65% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity dates of both of the mezzanine loans are extended when the maturity date of the mortgage loan is extended.
(3)
This loan bears interest at LIBOR plus 4.00% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity date of the other mezzanine loan is extended when the maturity date of the mortgage loan is extended.
(4)
This loan bears interest at LIBOR plus 5.00% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.25% . Brookfield DTLA has three options to extend the maturity date of this loan, each for a period of one year, as long as the maturity date of the other mezzanine loan is extended when the maturity date of the mortgage loan is extended.

42


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

(5)
This loan bears interest at LIBOR plus 1.80% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 4.50% . Brookfield DTLA has two options to extend the maturity date of this loan, each for a period of one year. As of June 30, 2019 , a future advance amount of $31.8 million is available under this loan that can be drawn by the Company to fund approved leasing costs (as defined in the underlying loan agreement), including tenant improvements and inducements, leasing commissions, and common area improvements.
(6)
This loan bears interest at LIBOR plus 2.18% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 5.75% . Brookfield DTLA has one option to extend the maturity date of this loan for a period of one year, subject to meeting certain debt yield and loan to value ratios (as specified in the loan agreement). As of June 30, 2019 , we did not meet the criteria specified in the loan agreement to extend this loan. See “Debt Maturities—777 Tower” below.
(7)
This loan bears interest at LIBOR plus 4.55% . As required by the loan agreement, we have entered into an interest rate cap contract that limits the LIBOR portion of the interest rate to 3.50% .
(8)
This loan bears interest at LIBOR plus 1.65% . As required by the loan agreement, we have entered into interest rate swap contracts to hedge this loan, which effectively fix the LIBOR portion of the interest rate at 2.29% . The effective interest rate of 3.90% includes interest on the swaps.

Debt Maturities

777 Tower—

Brookfield DTLA currently intends to refinance the mortgage loan secured by the 777 Tower office property on or about November 1, 2019 , its scheduled maturity date. As of June 30, 2019 , we did not meet the criteria specified in the loan agreement to extend the maturity date of this loan. As of June 30, 2019 , the Company does not expect to make a principal paydown when the loan is refinanced (based on current market conditions). There can be no assurance that this refinancing can be accomplished or what terms will be available in the market for this type of financing at the time of any refinancing.

Non-Recourse Carve Out Guarantees

All of Brookfield DTLA’s $2.2 billion of mortgage debt is subject to “non-recourse carve out” guarantees that expire upon elimination of the underlying loan obligations. In connection with all of these loans, Brookfield DTLA entered into “non-recourse carve out” guarantees, which provide for these otherwise non-recourse loans to become partially or fully recourse against DTLA Holdings or one of its subsidiaries, if certain triggering events (as defined in the loan agreements) occur.

Debt Reporting Compliance

Pursuant to the terms of certain of our mortgage loan agreements, Brookfield DTLA is required to report a debt service coverage ratio (“DSCR”) calculated using the formulas specified in the underlying loan agreements. We have submitted the required reports to the lenders for the measurement periods ended June 30, 2019 and were in compliance with the amounts required by the loan agreements.


43


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Discussion of Results of Operations

Comparison of the Three Months Ended June 30, 2019 to June 30, 2018

Condensed Consolidated Statements of Operations Information
(In millions, except percentage amounts)

For the Three Months Ended
Increase/
(Decrease)
%
Change
June 30,
2019
2018
Revenue:
Lease income
$
68.9

$
63.6

$
5.3

8
%
Parking
9.8

9.4

0.4

4
%
Interest and other
0.5

11.2

(10.7
)
(96
)%
Total revenue
79.2

84.2

(5.0
)
(6
)%
Expenses:
Rental property operating and maintenance
25.6

23.0

2.6

11
%
Real estate taxes
9.6

10.6

(1.0
)
(9
)%
Parking
2.4

2.4

—

—
%
Other expense
1.9

4.2

(2.3
)
(55
)%
Depreciation and amortization
25.9

23.2

2.7

12
%
Interest
25.1

26.1

(1.0
)
(4
)%
Total expenses
90.5

89.5

1.0

1
%
Other Income:





Gain from derecognition of assets
15.0

—

15.0

Equity in loss of unconsolidated
real estate joint venture
(0.3
)
—

(0.3
)
Total other income
14.7

—

14.7

Net income (loss)
$
3.4

$
(5.3
)
$
8.7


Lease Income

Lease income increased $5.3 million , or 8% , for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 , largely as a result of contractual rent increases.


44


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Interest and Other Revenue

Interest and other revenue decreased $10.7 million for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 , largely due to proceeds totaling $9.3 million received from the sale of artwork no longer on display at our Wells Fargo Center office properties due to renovation activities during 2018, for which there was no comparable activity during 2019.

Other Expense

Other expense decreased $2.3 million , or 55% , for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 , mainly as a result of income tax provisions recorded related to the sale of artwork during 2018, for which there was no comparable activity during 2019.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $2.7 million , or 12% , for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 , primarily due to increased investments in tenant improvements year over year.

Gain from Derecognition of Assets

During the three months ended June 30, 2019 , New OP entered into an agreement to contribute and transfer all of its wholly-owned interests in the Property Owner, the indirect property owner of 755 South Figueroa, a residential development property, in exchange for noncontrolling interests in a newly formed joint venture and recognized a $15.0 million gain.


45


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Comparison of the Six Months Ended June 30, 2019 to June 30, 2018

Condensed Consolidated Statements of Operations Information
(In millions, except percentage amounts)

For the Six Months Ended
Increase/
(Decrease)
%
Change
June 30,
2019
2018
Revenue:
Lease income
$
135.3

$
127.5

$
7.8

6
%
Parking
19.4

18.5

0.9

5
%
Interest and other
0.7

13.4

(12.7
)
(95
)%
Total revenue
155.4

159.4

(4.0
)
(3
)%
Expenses:
Rental property operating and maintenance
48.7

44.7

4.0

9
%
Real estate taxes
19.3

20.6

(1.3
)
(6
)%
Parking
5.1

5.1

—

—
%
Other expense
5.4

6.5

(1.1
)
(17
)%
Depreciation and amortization
51.5

47.6

3.9

8
%
Interest
50.0

49.9

0.1

—
%
Total expenses
180.0

174.4

5.6

3
%
Other Income:





Gain from derecognition of assets
15.0

—

15.0

Equity in loss of unconsolidated
real estate joint venture
(0.3
)
—

(0.3
)
Total other income
14.7

—

14.7

Net loss
$
(9.9
)
$
(15.0
)
$
5.1


Lease Income

Lease income increased $7.8 million , or 6% , for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 , largely as a result of contractual rent increases, changes in occupancy and recoverability of higher operating expenses .


46


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Interest and Other Revenue

Interest and other revenue decreased $12.7 million for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 , primarily due to a $9.3 million gain on the sale of artwork no longer on display at our Wells Fargo Center office properties due to renovation activities during 2018 , for which there was no comparable activity during 2019.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $3.9 million , or 8% , for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 , primarily due to increased investments in tenant improvements year over year.

Gain from Derecognition of Assets

During the six months ended June 30, 2019 , New OP entered into an agreement to contribute and transfer all of its wholly-owned interests in the Property Owner, the indirect property owner of 755 South Figueroa, a residential development property, in exchange for noncontrolling interests in a newly formed joint venture and recognized a $15.0 million gain.



47


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Discussion of Condensed Consolidated Cash Flows

Brookfield DTLA’s business requires continued access to adequate cash to fund its liquidity needs. The amount of cash Brookfield DTLA currently generates from its operations is not sufficient to cover its operating, financing and investing activities, resulting in “negative cash burn,” and there can be no assurance that the amount of Brookfield DTLA’s negative cash burn will decrease, or that it will not increase, in the future. If Brookfield DTLA’s operating cash flow and capital are not sufficient to cover its operating costs or to repay its indebtedness as it comes due, we may issue additional debt and/or equity, including to affiliates of Brookfield DTLA, which issuances could further adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock. In many cases, such securities may be issued if authorized by the board of directors of Brookfield DTLA without the approval of holders of the Series A preferred stock. See “Liquidity and Capital Resources—Potential Uses of Liquidity—Property Operations” above.

The following summary discussion of Brookfield DTLA’s cash flows is based on the condensed consolidated statements of cash flows in Item 1. “Financial Statements” and is not meant to be an all‑inclusive discussion of the changes in its cash flows for the periods presented below.

A summary of changes in Brookfield DTLA’s cash flows is as follows (in thousands):

For the Six Months Ended
Dollar
Change
June 30,
2019
2018
Net cash provided by operating activities
$
21,712

$
9,315

$
12,397

Net cash used in investing activities
(80,359
)
(35,270
)
(45,089
)
Net cash provided by financing activities
25,067

95,106

(70,039
)

Operating Activities

Brookfield DTLA’s cash flow from operating activities is primarily dependent upon (1) the occupancy level of its portfolio, (2) the rental rates achieved on its leases, and (3) the collectability of rent and other amounts billed to tenants and is also tied to the level of operating expenses. Net cash provided by operating activities during the six months ended June 30, 2019 totaled $21.7 million , compared to net cash provided by operating activities of $9.3 million during the six months ended June 30, 2018 . The $12.4 million increase in cash is primarily due to changes in working capital.


48


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Investing Activities

Brookfield DTLA’s cash flow from investing activities is generally impacted by the amount of capital expenditures for its properties. Net cash used in investing activities totaled $80.4 million during the six months ended June 30, 2019 , compared to net cash used in investing activities of $35.3 million during the six months ended June 30, 2018 . During the six months ended June 30, 2019 , the Company spent $40.7 million for tenant improvements at BOA Plaza, EY Plaza and 777 Tower in connection with lease renewals by major tenants along with continued atrium renovations at Wells Fargo Center totaling $20.7 million.

Financing Activities

Brookfield DTLA’s cash flow from financing activities is generally impacted by its loan activity, and contributions from and distributions to its mezzanine equity holders and distributions to its stockholders, if any. Net cash provided by financing activities totaled $25.1 million during the six months ended June 30, 2019 , compared to net cash provided by financing activities of $95.1 million during the six months ended June 30, 2018 . Proceeds from the Series B preferred interest were the source of the net cash provided by financing activities during the six months ended June 30, 2019 . Net proceeds from the refinancing of the EY Plaza and Figat7th mortgage loans, partially offset by distributions to the Series B and senior participating preferred interests, were the main source of net cash provided by financing activities during the six months ended June 30, 2018 .


49


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Off-Balance Sheet Arrangements

Brookfield DTLA did not have any off-balance sheet transactions, arrangements or obligations as of the date this report was filed, June 30, 2019 and December 31, 2018 , respectively.

Contractual Obligations

The following table provides information with respect to Brookfield DTLA’s commitments as of June 30, 2019 , including any guaranteed or minimum commitments under contractual obligations (in thousands):

2019
2020
2021
2022
2023
Thereafter
Total
Principal payments on
mortgage loans
$
220,000

$
765,000

$
708,186

$
—

$
58,500

$
400,000

$
2,151,686

Interest payments –

Fixed-rate debt (1)
19,454

38,697

30,590

18,726

16,803

11,025

135,295

Variable-rate swapped to
fixed-rate debt
4,512

9,066

—

—

—

—

13,578

Variable-rate debt (2)
22,065

31,407

9,366

—

—

—

62,838

Tenant-related
commitments (3)
21,714

3,300

1,782

2,332

1,143

2,582

32,853

$
287,745

$
847,470

$
749,924

$
21,058

$
76,446

$
413,607

$
2,396,250

__________
(1)
Interest payments on fixed-rate debt are calculated based on contractual interest rates and scheduled maturity dates.
(2)
Interest payments on variable-rate debt are calculated based on scheduled maturity dates and the one-month LIBOR rate in place on the debt as of June 30, 2019 plus the contractual spread per the loan agreements.
(3)
Tenant-related commitments include tenant improvements and leasing commissions and are based on executed leases as of June 30, 2019 .


50


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Related Party Transactions

Management Agreements

Certain subsidiaries of Brookfield DTLA have entered into arrangements with the Manager, pursuant to which the Manager provides property management and various other services. Property management fees under the management agreements entered into in connection with these arrangements are calculated based on 2.75% of rents collected (as defined in the management agreements). In addition, the Company pays the Manager an asset management fee, which is calculated based on 0.75% of the capital contributed by DTLA Holdings. Leasing management fees paid to the Manager range from 1.00% to 4.00% of expected rents, depending on the terms of the lease and whether a third-party broker was paid a commission for the transaction. Construction management fees are paid to the Manager based on 3.00% of hard and soft construction costs. Development management fees are paid to the Manager and Brookfield affiliates by the unconsolidated joint venture based on 3.00% of hard and soft construction costs.

A summary of costs incurred by the applicable Brookfield DTLA subsidiaries under these arrangements is as follows (in thousands):

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Property management fee expense
$
2,106

$
1,993

$
4,157

$
3,925

Asset management fee expense
1,582

1,582

3,165

3,165

Leasing and construction management fees
763

634

2,075

917

Development management fees (1)
264


—


264


—

General, administrative and
reimbursable expenses
954

851

1,440

1,249

__________
(1)
Amounts presented are calculated by applying the Company’s ownership interest percentage in the unconsolidated joint venture as of period end to the amounts capitalized during each of the periods presented.


51


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Insurance Agreements

Properties held by certain Brookfield DTLA subsidiaries and affiliates are covered under insurance policies entered into by the Manager. Insurance premiums for Brookfield DTLA’s properties are paid by the Manager. Brookfield DTLA reimburses the Manager for the amount of fees and expenses related to such policies that have been allocated to the Company’s properties as determined by the Manager in its reasonable discretion taking into consideration certain facts and circumstances, including the value of the Company’s properties.

A summary of costs incurred by the applicable Brookfield DTLA subsidiaries and affiliates under this arrangement is as follows (in thousands):

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Insurance expense
$
2,193

$
1,972

$
4,391

$
3,927


Other Related Party Transactions with BAM Affiliates

A summary of the impact of other related party transactions with BAM affiliates on the Company’s condensed consolidated statement of operations is as follows (in thousands):

For the Three Months Ended
For the Six Months Ended
June 30,
June 30,
2019
2018
2019
2018
Lease income
$
817

$
537

$
1,426

$
957

Interest and other revenue
105

—

105

—

Rental property operating and
maintenance expense
70

231

285

455

Other expense
77

—

77

—


Litigation

See Part II, Item 1. “Legal Proceedings” of this Quarterly Report on Form 10-Q.


52


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Critical Accounting Policies

Please refer to Brookfield DTLA’s Annual Report on Form 10-K filed with the SEC on April 1, 2019 for a discussion of our critical accounting policies for the year ended December 31, 2018 . For six months ended June 30, 2019 , there were no material changes to these policies, other than the adoption of Accounting Standards Codification (“ASC”) Topic 842, Leases , described in Item 1. “Financial Statements—Notes to Condensed Consolidated Financial Statements—Note 3 “Leases” of this Quarterly Report on Form 10-Q.

Recent Accounting Pronouncements

Accounting Pronouncement Adopted Effective January 1, 2019

Please refer to Item 1. “Financial Statements—Notes to Condensed Consolidated Financial Statements—Note 3 “Leases” of this Quarterly Report on Form 10-Q for a discussion of our adoption of Topic 842, Leases , on January 1, 2019.

Accounting Pronouncements Effective January 1, 2020

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to amend the accounting for credit losses for certain financial instruments. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. In November 2018, the FASB released ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses . This amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Subtopic 842-30, Leases—Lessor . ASU 2016-13 and ASU 2018-19 are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019, with early adoption permitted as of the fiscal year beginning after December 15, 2018, including adoption in an interim period. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.


53


BROOKFIELD DTLA FUND OFFICE TRUST INVESTOR INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), to amend the disclosure requirements for fair value measurements. The amendments in ASU 2018-13 include new, modified and eliminated disclosure requirements and are the result of a broader disclosure project, FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements , that was finalized on August 28, 2018. The FASB used the guidance in the Concepts Statement to improve the effectiveness of the disclosure requirements in Topic 820. ASU 2018-13 is effective for interim and annual periods in fiscal years beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted for any eliminated or modified disclosures. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.

In October 2018, the FASB issued ASU 2018-17, Consolidation ( Topic 810 ), Targeted Improvements to Related Party Guidance for Variable Interest Entities , which amends two aspects of the related-party guidance in Topic 810. Specifically, ASU 2018-17 (1) adds an elective private company scope exception to the variable interest entity guidance for entities under common control and (2) removes a sentence in ASC 810-10-55-37D regarding the evaluation of fees paid to decision makers to conform with the amendments in ASU 2016-17, Consolidation ( Topic 810 ), Interests Held through Related Parties That Are under Common Control (issued in October 2016). ASU 2018-17 is effective for interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on Brookfield DTLA’s consolidated financial statements.


54

Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

See Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in Brookfield DTLA’s Annual Report on Form 10-K filed with the SEC on April 1, 2019 for a discussion regarding our exposure to market risk. Our exposure to market risk has not changed materially since year end 2018 .

Item 4.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Brookfield DTLA maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the U.S. Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), Brookfield DTLA carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and its principal financial officer, of the effectiveness of the design and operation of Brookfield DTLA’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, G. Mark Brown, our principal executive officer, and Bryan D. Smith, our principal financial officer, concluded that these disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2019 .

Changes in Internal Control over Financial Reporting

There have been no changes in Brookfield DTLA’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2019 that have materially affected, or that are reasonable likely to materially affect, our internal control over financial reporting.


55

PART II — OTHER INFORMATION

Item 1.
Legal Proceedings.

Brookfield DTLA and its subsidiaries may be subject to pending legal proceedings and litigation incidental to its business. After consultation with legal counsel, management believes that any liability that may potentially result upon resolution of such matters is not expected to have a material adverse effect on the Company’s business, financial condition or consolidated financial statements as a whole.

Item 1A.
Risk Factors.

Factors That May Affect Future Results
(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995 (as set forth in Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, include statements regarding our operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods, and include words such as “expects,” “anticipates,” “plans,” “believes,” “estimates,” “seeks,” “intends,” “targets,” “projects,” “forecasts,” “likely,” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.”

Although Brookfield DTLA believes that its anticipated future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information because they involve known and unknown risks, uncertainties and other factors, many of which are beyond its control, which may cause Brookfield DTLA’s actual results, performance or achievements to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements and information.

Factors that could cause actual results to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to:

•
Risks generally incident to the ownership of real property, including the ability to retain tenants and rent space upon lease expirations, the financial condition and solvency of our tenants, the relative illiquidity of real estate and changes in real estate taxes, regulatory compliance costs and other operating expenses;

•
Risks associated with the Downtown Los Angeles market, which is characterized by challenging leasing conditions, including limited numbers of new tenants coming into the market and the downsizing of large tenants in the market such as accounting firms, banks and law firms;


56

•
Risks related to increased competition for tenants in the Downtown Los Angeles market, including aggressive attempts by competing landlords to fill large vacancies by providing tenants with lower rental rates, increasing amounts of free rent and providing larger allowances for tenant improvements;

•
The impact or unanticipated impact of general economic, political and market factors in the regions in which Brookfield DTLA or any of its subsidiaries does business;

•
The use of debt to finance Brookfield DTLA’s business or that of its subsidiaries;

•
The behavior of financial markets, including fluctuations in interest rates;

•
Uncertainties of real estate development or redevelopment;

•
Global equity and capital markets and the availability of equity and debt financing and refinancing within these markets;

•
Risks relating to Brookfield DTLA’s insurance coverage;

•
The possible impact of international conflicts and other developments, including terrorist acts;

•
Potential environmental liabilities;

•
Dependence on management personnel;

•
The ability to complete and effectively integrate acquisitions into existing operations and the ability to attain expected benefits therefrom;

•
Operational and reputational risks;

•
Catastrophic events, such as earthquakes and hurricanes; and

•
The impact of legislative, regulatory and competitive changes and other risk factors relating to the real estate industry, as detailed from time to time in the reports of Brookfield DTLA filed with the SEC.

Brookfield DTLA cautions that the foregoing list of important factors that may affect future results is not exhaustive. When relying on Brookfield DTLA’s forward-looking statements or information, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Except as required by law, Brookfield DTLA undertakes no obligation to publicly update or revise any forward‑looking statements or information, whether written or oral, that may be as a result of new information, future events or otherwise.


57

Additional material risk factors are discussed in other sections of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC on April 1, 2019 . Those risks are also relevant to our performance and financial condition. Moreover, we operate in a highly competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.
Defaults Upon Senior Securities.

Dividends on the Series A preferred stock are cumulative and therefore will continue to accrue at an annual rate of $1.90625 per share. As of July 31, 2019 , the cumulative amount of unpaid dividends totaled $177.5 million .

Item 4.
Mine Safety Disclosures.

Not applicable.

Item 5.
Other Information.

None.

Item 6.
Exhibits.

Exhibit No.
Exhibit Description
Certification of Principal Executive Officer dated August 12, 2019
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer dated August 12, 2019
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer and Principal Financial Officer dated
August 12, 2019 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (1)
__________
*
Filed herewith.
**
Furnished herewith.

(1)
This exhibit should not be deemed to be “filed” for purposes of Section 18 of the Exchange Act.


58

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:
As of August 12, 2019

BROOKFIELD DTLA FUND OFFICE
TRUST INVESTOR INC.
Registrant
By:
/s/ G. MARK BROWN
G. Mark Brown
Chairman of the Board
(Principal executive officer)
By:
/s/ BRYAN D. SMITH
Bryan D. Smith
Chief Financial Officer
(Principal financial officer)

59
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1 Organization and Description Of BusinessNote 2 Basis Of PresentationNote 3 LeasesNote 4 Investment in Unconsolidated Real Estate Joint VentureNote 5 Rents, Deferred Rents and Other Receivables, NetNote 6 Intangible Assets and LiabilitiesNote 7 Mortgage LoansNote 8 Accounts Payable and Other LiabilitiesNote 9 Mezzanine EquityNote 10 Stockholders DeficitNote 11 Noncontrolling InterestsNote 12 Accumulated Other Comprehensive (loss) IncomeNote 13 Income TaxesNote 14 Fair Value MeasurementsNote 15 Financial InstrumentsNote 16 Related Party TransactionsNote 17 Commitments and ContingenciesItem 2. Management S Discussion and Analysis Of Financial ConditionItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits

Exhibits

31.1* Certification of Principal Executive Officer dated August12,2019pursuant to Section302 of the Sarbanes-Oxley Act of2002 31.2* Certification of Principal Financial Officer datedAugust12,2019pursuant to Section302 of the Sarbanes-Oxley Act of2002 32.1** Certification of Principal Executive Officer and Principal Financial Officer datedAugust12,2019 pursuant to 18 U.S.C. Section1350, as adopted pursuant toSection906 of the Sarbanes-Oxley Actof2002 (1)